The Golden L.E.A.F. (Long-term Economic Advancement Foundation), Inc.

Transcription

1 (Long-term Economic Advancement Foundation), Inc. Financial Statements and Other Report Years Ended June 30, 2017 and 2016 The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.

2 Financial Statements and Other Report Years Ended June 30, 2017 and 2016

3 Contents Independent Auditor s Report 3-4 Management s Discussion and Analysis (Unaudited) 5-10 Financial Statements Statements of Net Position and Governmental Fund Balance Sheets Statements of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance Notes to Financial Statements Other Report Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of the Financial Statements Performed in Accordance with Government Auditing Standards 30-31

4 Tel: Fax: Fayetteville Street Suite 300 Raleigh, NC Independent Auditor s Report To the Board of Directors The Golden L.E.A.F. Rocky Mount, North Carolina Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities and general fund of The Golden L.E.A.F. (the Foundation ), a component unit of the State of North Carolina, as of and for the years ended June 30, 2017 and 2016, and the related notes to the financial statements, which collectively comprise the Foundation s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guaran0tee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 3

5 Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and general fund of the Foundation, as of June 30, 2017 and 2016, and the respective changes in financial position thereof for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 5 through 10 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Reporting Required by Government Auditing Standards In accordance with Governmental Auditing Standards, we have also issued our report dated September 29, 2017 on our consideration of the Foundation s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Foundation s internal control over financial reporting and compliance. September 29,

6 Management s Discussion and Analysis (Unaudited) Our discussion and analysis of The Golden L.E.A.F. (Long-term Economic Advancement Foundation), Inc. (the Foundation ) provides an overview of the Foundation s financial position and activities for the fiscal year ended June 30, 2017, with comparative information for the fiscal year ended June 30, Please read it in conjunction with the Foundation s financial statements and accompanying notes to the financial statements. Overview In 1999, the North Carolina General Assembly created The Golden L.E.A.F., Inc. to administer onehalf of North Carolina s (the State ) share of the Master Settlement Agreement ( MSA ) with cigarette manufacturers. A nonprofit organization devoted to the economic well-being of North Carolinians, the Foundation endeavors to strengthen the State s economy through diverse grant making. Financial Highlights The total assets of the Foundation increased by $122.5 million during 2017 from $919.9 million at June 30, 2016 to $1,042.4 million at June 30, The Foundation ended 2017 with investments and cash and cash equivalents totaling $1,038.6 million, an increase of $122.4 million from June 30, The total liabilities of the Foundation increased by $103.7 million during 2017 from $68.0 million at June 30, 2016 to $171.7 million at June 30, Almost all of this increase was in grants payable which increased from $67.8 million at June 30, 2016 to $171.5 million at June 30, In July 2013, the North Carolina General Assembly enacted legislation that purports to repeal those sections of Session Law in which the General Assembly approved the transfer and assignment to the Foundation of fifty percent (50%) of each annual payment of MSA funds. In September 2015, the North Carolina General Assembly enacted Session Law , which provides for the appropriation of $10,000,000 of tobacco settlement funds to the Foundation each year. The Foundation received $10,000,000 of tobacco settlement funds in each of the fiscal years 2017 and The Foundation s investment portfolio generated income of $116.7 million in 2017 compared to a net loss of $4.2 million in The Foundation s investment assets returned 13.1% compared to (0.4%) in The increase in investment earnings reflects broader market performance and the Foundation's asset allocation. The S&P 500 Index (domestic equities) returned 17.9% in fiscal year 2017 compared with 4.0% in fiscal year The MSCI EAFE Index (international equities) returned 20.3% in fiscal year 2017 versus a return of (10.2%) in fiscal year Barclays Aggregate Index (fixed income) returned (0.3%) in fiscal year 2017 compared with 6.0% in fiscal year 2016 and the HFRI Index (hedge funds) returned 8.0% in fiscal year 2017 versus (2.0%) in fiscal year

7 Management s Discussion and Analysis (Unaudited) The Foundation awarded grants of $133.6 million in 2017, a nearly threefold increase from 2016 levels. In addition to $13.5 million in grants awarded through the Foundation s Open Grants Program, Economic Catalyst Cycle, scholarship and other programs, grants were awarded to support the following special initiatives: Plant Sciences Initiative - $45.0 million: Golden LEAF awarded grants to assist in the construction of North Carolina State University s Plant Sciences Initiative facility, which is designed to increase the quality and quantity of cutting-edge research to benefit North Carolina s diverse agricultural communities. Golden LEAF joined agriculture commodity groups and private donors and leveraged state support from the NC Connect Bond act to enable this bold vision. Disaster Recovery Initiative - $26.5 million: As a result of Hurricane Matthew, wildfires in western North Carolina, or Tropical Storms Julia and Hermine, more than 30,000 businesses suffered physical or economic damage affecting more than 400,000 employees. The Disaster Recovery Act of 2016 allocated $25 million of stateappropriated funds to Golden LEAF to administer grant programs to fund local government infrastructure and small business loans to help local economies recover as quickly as possible. As of June 30, 2017, $24,463,018 of the total had been awarded in grants, $500,000 had been designated by the Foundation s board for a future grant, and $36,982 remained available for future disaster recovery grants. The Foundation also awarded $2.0 million in grants from its own funds to eligible entities to make bridge loans to small businesses expected to receive future Small Business Administration loan capital. Major Site Development Initiative - $25.0 million: The Major Site Development Initiative was developed to help ready large sites to attract major employers to rural, tobacco dependent, and economically distressed areas of North Carolina. To be as competitive as possible, those sites must be served by public infrastructure, such as water and sewer, to reduce the time it will take for an employer to complete site development and begin operations. The Foundation awarded five grants to fund construction or improvement of public infrastructure that serves publicly owned or publicly controlled industrial sites that have the potential to attract employers that can create a large number of jobs and have a significant positive effect on the local, regional, and state economy. Community Based Grantsmaking Initiative - $22.2 million: Launched in the summer of 2014 as a continuation of the Foundation s community-based grantsmaking and as a response to completion and evaluation of the Community Assistance Initiative, this initiative is designed to identify projects supporting economic growth that are ready for implementation and have the potential to have a significant impact in the areas of agriculture, health care employment, infrastructure, economic development, workforce training and education. The Foundation invites all counties to apply to participate in the initiative by region, which is anticipated to take four years to complete. It is a competitive process, but eligible entities located in all counties within a designated region have an opportunity to apply to participate. The $17.3 million awarded in 2016 was to support projects in the Southeast and Western Prosperity Zones. The $22.2 million awarded in 2017 was to support projects in the Southwest and Piedmont Triad Prosperity Zones. 6

8 Management s Discussion and Analysis (Unaudited) Broadband Initiative - $1.4 million: The Foundation awarded a grant to MCNC to expand the Golden LEAF Rural Broadband Initiative by extending middle-mile fiber from Guilford into Randolph, Montgomery, and Richmond counties. The Foundation made grant payments of $28.0 million in 2017 compared to $30.7 million in fiscal year Administrative costs were $2.6 million in 2017, an increase of approximately $117,000 from Administrative costs represented 1.9% of grantsmaking in Using This Annual Report This annual report consists of two financial statements. The Statements of Net Position and Governmental Fund Balance Sheets present the assets, liabilities and fund balance/net position at June 30, 2017 and The Statements of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance present the revenues, expenditures, and changes in fund balance/net position for the fiscal years ended June 30, 2017 and The Notes to Financial Statements contain additional information that is essential to a full understanding of the data in the financial statements. Statements of Net Position and Governmental Fund Balance Sheets Condensed Statements of Net Position and Governmental Fund Balance Sheets: June 30, Assets Current assets $ 1,038,999,385 $ 916,425,827 $ 941,156,934 Capital assets nondepreciable 903, , ,906 Capital assets depreciable, net 2,544,002 2,608,620 2,679,726 Total Assets $ 1,042,447,293 $ 919,938,353 $ 944,740,566 Total Liabilities $ 171,651,037 $ 67,996,660 $ 69,494,824 Fund Balance/Net Position Net investment in capital assets 3,447,908 3,512,526 3,583,632 Restricted for broadband projects 747,971 1,726, ,851 Unassigned/unrestricted 866,600, ,703, ,148,259 Total Fund Balance/Net Position 870,796, ,941, ,245,742 Total Liabilities and Fund Balance/ Net Position $ 1,042,447,293 $ 919,938,353 $ 944,740,566 7

9 Management s Discussion and Analysis (Unaudited) 2017 Total assets at June 30, 2017 were $1,042.4 million, an increase of approximately $122.5 million from June 30, The assets of the Foundation are comprised primarily of investments and cash and cash equivalents. The total of investments, cash and cash equivalents at June 30, 2017 was $1,038.6 million, compared to $916.2 million at June 30, This increase resulted primarily from investment income exceeding payments for grants and other expenditures. Net capital assets were $3.4 million at June 30, 2017, a decline of $65,000 from 2016 primarily due to depreciation. The liabilities of the Foundation are comprised primarily of grants payable. Grants payable totaled $171.7 million at June 30, 2017, compared to $68.0 million at June 30, Current year grant awards of $133.6 million outpaced payment of current and prior year grant awards of $28.0 million. The Foundation also rescinded $1.9 million in grant awards in The Fund Balance/Net Position section of the Statements of Net Position and Governmental Fund Balance Sheets presents the amount of the assets of the Foundation, less its liabilities. Restricted fund balance/net position represents resources that the Foundation is required to spend in accordance with restrictions provided by third parties Total assets at June 30, 2016 were $919.9 million, a decrease of approximately $24.8 million from June 30, The assets of the Foundation are comprised primarily of investments and cash and cash equivalents. The total of investments, cash and cash equivalents at June 30, 2016 was $916.2 million, compared to $940.8 million at June 30, This decrease resulted primarily from payments for grants and other expenditures exceeding investment income. Net capital assets were $3.5 million at June 30, 2016, a decline of $71,106 from 2015 primarily due to depreciation. The liabilities of the Foundation are comprised primarily of grants payable. Grants payable totaled $67.8 million at June 30, 2016, compared to $69.4 million at June 30, The decrease in grants payable resulted primarily from the rescission of $5.0 million in grant awards in In addition, current year grant awards of $34.2 million outpaced payment of current and prior year grant awards of $30.7 million. The Fund Balance/Net Position section of the Statements of Net Position and Governmental Fund Balance Sheets presents the amount of the assets of the Foundation, less its liabilities. Restricted fund balance/net position represents resources that the Foundation is required to spend in accordance with restrictions provided by third parties. 8

10 Management s Discussion and Analysis (Unaudited) Statements of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance Condensed Statements of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance: Years ended June 30, Total Revenues $ 152,074,107 $ 7,007,589 $ 21,682,569 Total Expenditures/Expenses 133,219,544 30,311,638 31,912,395 Change in Fund Balance/Net Position 18,854,563 (23,304,049) (10,229,826) Fund Balance/Net Position, beginning of year 851,941, ,245, ,475,568 Fund Balance/Net Position, end of year $ 870,796,256 $ 851,941,693 $ 875,245,742 These statements show the revenues and the expenses of the Foundation for the years ended June 30, 2017, 2016 and 2015, and the corresponding effect on fund balance/net position Total revenues were $152.1 million in 2017 and $7.0 million in In 2017, the primary source of revenue was investment income. The Foundation had investment income of $116.7 million in 2017 compared to a net loss of $4.2 million in In 2017, the Foundation received an allocation of $25 million of state appropriated funds to administer grant programs to fund local government infrastructure and small business loans for communities recovering from hurricanes, tropical storms and wildfires. The Foundation received no disaster recovery funds in The Foundation received $10.0 million of proceeds from tobacco settlement funds in 2017 and Grant revenue to support rural broadband projects was approximately $390,000 in 2017 compared to $1.2 million in Total expenditures/expenses were $133.2 million in 2017 and $30.3 million in The largest expense of the Foundation in 2017 and 2016 was grant disbursements. Grant disbursements represent grants awarded net of grants rescinded and grant funds returned. Grants were awarded (excluding grants rescinded or returned) in the amount of $133.6 million during 2017 and $34.2 million in Administrative costs were $2.6 million in 2017, an increase of approximately $117,000 from 2016 primarily as the result of expenses to repair damage caused by Hurricane Matthew along with increased personnel costs and professional fees. Depreciation expense was approximately $100,000 in 2017 and approximately $98,000 in

11 Management s Discussion and Analysis (Unaudited) 2016 Total revenues were $7.0 million in 2016 and $21.7 million in The primary source of revenue in 2016 was $10.0 million of proceeds from tobacco settlement funds. The Foundation received no proceeds from tobacco settlement funds in In 2015, the primary source of revenue was investment income. The Foundation had a net investment loss of $4.2 million in 2016 compared to net investment income of $21.2 million in In 2016, the Foundation received approximately $1.2 million in grant revenue to support rural broadband projects compared to approximately $514,000 in Total expenditures/expenses were $30.3 million in 2016 and $31.9 million in The largest expense of the Foundation in 2016 and 2015 was grant disbursements. Grant disbursements represent grants awarded net of grants rescinded and grant funds returned. Grants were awarded (excluding grants rescinded or returned) in the amount of $34.2 million during 2016 and $35.4 million in Administrative costs were $2.5 million in 2016, an increase of approximately $34,000 from 2015 primarily as the result of higher personnel costs. Depreciation expense was approximately $98,000 in 2016 and approximately $97,000 in Notes to Financial Statements The reader is referred to these notes for a more complete understanding of the financial statements of the Foundation. They contain a summary of the significant accounting policies as well as other information. Requests for Information This report is designed to provide a general overview of the Foundation s finances and to show the Foundation s accountability for the funds it receives. Questions concerning any of the information provided in this report or requests for additional information should be addressed to The Golden L.E.A.F. Foundation, 301 N. Winstead Ave., Rocky Mount, NC

12 Financial Statements

13 Statement of Net Position and Governmental Fund Balance Sheet Reclassifications and General Eliminations Statement of June 30, 2017 Fund (Note 6) Net Position Assets Cash and cash equivalents $ 1,286,773 $ - $ 1,286,773 Sales tax refund and other receivables 94,418-94,418 Note receivable 228, ,640 Prepaid items 108, ,114 Investments 1,037,281,440-1,037,281,440 Capital assets nondepreciable - 903, ,906 Capital assets depreciable, net - 2,544,002 2,544,002 Total Assets $ 1,038,999,385 $ 3,447,908 $ 1,042,447,293 Liabilities Accounts payable $ 91,542 $ - $ 91,542 Accrued liabilities 85,438-85,438 Grants payable 171,474, ,474,057 Total Liabilities 171,651, ,651,037 Fund Balance/Net Position Nonspendable prepaid items 108,114 (108,114) - Net investment in capital assets - 3,447,908 3,447,908 Restricted for broadband projects 747, ,971 Restricted for disaster recovery projects 536, ,982 Unassigned/unrestricted 865,955, , ,063,395 Total Fund Balance/Net Position 867,348,348 3,447, ,796,256 Total Liabilities and Fund Balance/ Net Position $ 1,038,999,385 $ 3,447,908 $ 1,042,447,293 See accompanying notes to financial statements. 12

14 Statement of Net Position and Governmental Fund Balance Sheet Reclassifications and General Eliminations Statement of June 30, 2016 Fund (Note 6) Net Position Assets Cash and cash equivalents $ 869,099 $ - $ 869,099 Sales tax refund and other receivables Note receivable 174, ,211 Prepaid items 99,548-99,548 Investments 915,282, ,282,839 Capital assets nondepreciable - 903, ,906 Capital assets depreciable, net - 2,608,620 2,608,620 Total Assets $ 916,425,827 $ 3,512,526 $ 919,938,353 Liabilities Accounts payable $ 98,570 $ - $ 98,570 Accrued liabilities 60,737-60,737 Grants payable 67,837,353-67,837,353 Total Liabilities 67,996,660-67,996,660 Fund Balance/Net Position Nonspendable prepaid items 99,548 (99,548) - Net investment in capital assets - 3,512,526 3,512,526 Restricted for broadband projects 1,726,018-1,726,018 Unassigned/unrestricted 846,603,601 99, ,703,149 Total Fund Balance/Net Position 848,429,167 3,512, ,941,693 Total Liabilities and Fund Balance/ Net Position $ 916,425,827 $ 3,512,526 $ 919,938,353 See accompanying notes to financial statements. 13

15 Statement of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance Reclassifications and General Eliminations Statement of Year ended June 30, 2017 Fund (Note 6) Activities Revenues State general fund appropriation $ 25,000,000 $ - $ 25,000,000 Proceeds from state settlement 10,000,000-10,000,000 Net investment income 116,679, ,679,666 Grant revenue 389, ,953 Other income 4,488-4,488 Total Revenues 152,074, ,074,107 Expenditures/Expenses Grant distributions 130,478, ,478,012 Administrative costs 2,569,678-2,569,678 Capital outlays 37,685 (37,685) - Loss on capital assets - 2,110 2,110 Depreciation expense - 100, ,193 Unrelated business income tax 69,551-69,551 Total Expenditures/Expenses 133,154,926 64, ,219,544 Excess Revenues Over (Under) Expenditures/Expenses 18,919,181 (64,618) 18,854,563 Change in Fund Balance/Net Position 18,919,181 (64,618) 18,854,563 Fund Balance/Net Position, beginning of year 848,429,167 3,512, ,941,693 Fund Balance/Net Position, end of year $ 867,348,348 $ 3,447,908 $ 870,796,256 See accompanying notes to financial statements. 14

16 Statement of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance Reclassifications and General Eliminations Statement of Year ended June 30, 2016 Fund (Note 6) Activities Revenues Proceeds from state settlement $ 10,000,000 $ - $ 10,000,000 Net investment loss (4,207,910) - (4,207,910) Grant revenue 1,212,167-1,212,167 Other income 3,332-3,332 Total Revenues 7,007,589-7,007,589 Expenditures/Expenses Grant distributions 27,739,556-27,739,556 Administrative costs 2,452,216-2,452,216 Capital outlays 28,807 (28,807) - Loss on capital assets - 2,081 2,081 Depreciation expense - 97,832 97,832 Unrelated business income tax 19,953-19,953 Total Expenditures/Expenses 30,240,532 71,106 30,311,638 Excess Revenues Under Expenditures/Expenses (23,232,943) (71,106) (23,304,049) Change in Fund Balance/Net Position (23,232,943) (71,106) (23,304,049) Fund Balance/Net Position, beginning of year 871,662,110 3,583, ,245,742 Fund Balance/Net Position, end of year $ 848,429,167 $ 3,512,526 $ 851,941,693 See accompanying notes to financial statements. 15

17 Notes to Financial Statements 1. Summary of Significant Accounting Policies The following is a summary of the significant accounting principles and policies used in the preparation of these financial statements: Reporting Entity The Golden L.E.A.F. (Long-Term Economic Advancement Foundation), Inc. (the Foundation ) is a not-for-profit corporation ordered to be established by the consent Decree and Final Judgment in the State of North Carolina vs. Philip Morris Incorporated, et al. The Foundation was established for the purpose of receipt and distribution of fifty percent of the funds allocated to the North Carolina State Specific Account, such funds to be used to provide economic impact assistance to economically affected or tobacco-dependent regions of North Carolina. As discussed in Note 5, in 2013 the North Carolina General Assembly repealed the legislation that had approved the transfer of MSA funds to the Foundation. Subsequently, in September 2015, the North Carolina General Assembly enacted legislation which provides for the appropriation of $10,000,000 of tobacco settlement funds to the Foundation each year. For financial reporting purposes, the Foundation is deemed to be a nonmajor component unit of the State of North Carolina, and is included as such in the State of North Carolina Comprehensive Annual Financial Report. The Foundation is governed by a 15-member board, all of whom are appointed by either the Governor, President Pro Tempore of the Senate, or the Speaker of the House. The Foundation provides grants to state agencies and component units, creating a financial benefit/burden relationship. Basis of Presentation These financial statements have been prepared in conformity with the accounting principles and reporting guidelines established by the Government Accounting Standards Board ( GASB ). General Fund The general fund is used to account for all revenues and expenses applicable to the general operations of the Foundation that are not required either legally or by governmental accounting standards to be accounted for in another fund. Measurement Focus and Basis of Accounting The Foundation uses the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized when they become measureable and available to finance expenditures of the current period. Expenditures generally are recognized when the related liability is incurred. However, the statement of net position and governmental fund balance and the statement of activities and governmental fund revenues, expenditures and changes in fund balance are reported using economic resources measurement focus and accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when they are earned and expenses are recorded when the liability is incurred, regardless of the timing of the cash flow. 16

18 Notes to Financial Statements Budgetary Requirement The Foundation s enabling legislation requires that the Foundation s Board of Directors consult with the Joint Legislative Commission on Governmental Operations prior to adopting an annual operating budget. As of June 30, 2017, the Foundation s Board of Directors has adopted a preliminary budget only for the general fund on a basis consistent with generally accepted accounting principles, subject to finalization after the Foundation consults with the Joint Legislative Commission on Government Operations. Budgetary control is expected to be at the object of expense classification level (personal services, operating expenditures, capital outlay). Budgetary changes within expense classifications are expected to be made at the discretion of the Foundation. Net Position Net position represents the difference between assets and liabilities. Net position invested in capital assets consists of capital assets, less accumulated depreciation. Net position is reported as restricted when there are limitations imposed on their use through legislation, legal responsibility or third-party requirement, which restrict the use of funds to a specific purpose. Funds received from the North Carolina State Specific Accounts are unrestricted, but are invested as directed by the Board of Directors, with the income from investment being used for operating expenses and to fund grants. Grant funds received for rural broadband projects are reported as restricted. When both restricted and unrestricted funds are available for expenditures, the Foundation s general policy is to first expend restricted resources then to expend unrestricted resources. Fund Balance Fund balance represents the difference between assets and liabilities in the governmental fund financial statements. The Foundation s fund balance is classified in the following categories: Nonspendable fund balance represents amounts that cannot be spent due to legal requirements or because it is not in spendable form. The Foundation reports nonspendable fund balance for prepaid items. Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation. Grant funds received for rural broadband and disaster recovery projects are reported as restricted. Unassigned fund balance is the residual fund balance of the general fund. Investments Investments include obligations of governments, long-duration fixed income investments, listed securites such as common stocks, SEC-registered mutual funds, absolute return funds, private equity limited partnerships, real asset limited partnerships, real estate investment trusts, money market funds and certificates of deposit. Investments are accounted for at fair value. Fair value for investment assets with readily determinable market values are based on quoted market prices. For certain international equity funds, absolute return funds, private equity limited partnerships, and real asset limited partnerships without a readily determinable fair value, the investment is reported at estimated fair value as determined by the underlying asset s manager. The investment 17

19 Notes to Financial Statements asset managers estimate current fair value of nonpublicly traded assets in their portfolios taking into consideration the financial performance of the issuer, cash flow analysis, recent sales prices, market comparable transactions, a new round of financing, a change in economic conditions and other pertinent information. The Foundation reviews the values provided by the asset managers as well as the assumptions used in determining fair value. These investment values may differ from the values that would have been used had a ready market for these investments existed and differences could be material. The financial statements of these investments are audited at least annually (typically at December 31) by independent auditors. At June 30, 2017 and 2016, fair value of investments based on other than quoted market prices was $715.7 million and $643.0 million, respectively. Realized investment gains and losses are determined using the specific identification basis and are recorded as investment income in the accompanying Statements of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance. Changes in net unrealized gains and losses are also recognized as a component of investment income. Capital Assets Generally, capital assets are defined by the Foundation as assets with an initial value or cost greater than or equal to $500 and an estimated useful life of two or more years. Capital assets are stated at cost less accumulated depreciation. Estimated useful lives are five years for equipment, seven years for furniture and fixtures and ten to forty years for buildings. Prepaid Items The Foundation allocates the cost of insurance between the related accounting periods. Amounts paid for services not yet provided are recorded as prepaid and amortized over the service period. Grants Payable The Foundation records grants payable when the Board of Directors approves the grant. The Programs Committee (a subset of the Board of Directors) evaluates the grant applications and makes recommendations to the entire Board of Directors. Applicants that are chosen by the Board of Directors must fill out and sign a Grantee Acknowledgement and Agreement which stipulates guidelines and related requirements. Several requirements must be met by the grantees prior to the disbursement of funds. Income Taxes The Foundation is a not-for-profit organization that is exempt from federal income taxes under Section 501(a) as an organization described in Section 501(c)(3) of the Internal Revenue Code. 2. Fair Value Measurements The Foundation s investments are recorded at fair value at June 30, 2017 and GASB Statement No. 72, Fair Value Measurement and Application ( GASB 72 ), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This statement establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Inputs are used in applying the various valuation techniques and take into account the assumptions 18

20 Notes to Financial Statements that market participants use to make valuation decisions. Inputs may include price information, credit data, interest and yield curve data, and other factors specific to the financial instrument. Observable inputs reflect market data obtained from independent sources. In contrast, unobservable inputs reflect the entity s assumptions about how market participants would value the financial instrument. Valuation techniques should maximize the use of observable inputs to the extent available. A financial instrument s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used for financial instruments measured at fair value on a recurring basis: Level 1 Investments whose values are based on quoted prices for identical assets in active markets that a government can access at the measurement date. Level 2 Investments with inputs other than quoted prices included within Level 1 that are observable for an asset, either directly or indirectly Level 3 Investments classified as Level 3 have unobservable inputs and may require a degree of professional judgment. The following table summarizes the Foundation s investments within the fair value hierarchy at June 30, 2017 and 2016: Fair Value Measurements Using June 30, 2017 Fair Value Level 1 Level 2 Level 3 Investments by fair value level: U.S. Treasuries $ 58,066,061 $ 58,066,061 $ - $ - Fixed income funds 51,873,818 51,074, ,736 - Domestic stocks and equity funds 145,920, ,870,519 7,996,760 52,800 Total investments by fair value level $ 255,859,958 $247,010,662 $ 8,796,496 $ 52,800 Investments measured at net asset value ( NAV ): International equity funds $ 272,697,298 Absolute return funds 248,817,696 Fixed income fund 10,231,690 Private equity limited partnerships 66,653,382 Real estate and other real asset funds 117,269,109 Total investments measured at NAV 715,669,175 Total investments measured at fair value $ 971,529,133 19

21 Notes to Financial Statements Fair Value Measurements Using June 30, 2016 Fair Value Level 1 Level 2 Level 3 Investments by fair value level: U.S. Treasuries $ 69,777,296 $ 69,777,296 $ - $ - Fixed income funds 48,835,903 48,835, Domestic stocks and equity funds 122,920, ,957,878 4,962,777 - Total investments by fair value level $ 241,533,854 $ 236,571,077 $ 4,962,777 $ - Investments measured at NAV: International equity funds $ 230,922,436 Absolute return funds 219,954,055 Private equity limited partnerships 71,097,365 Real estate and other real asset funds 121,015,385 Total investments measured at NAV 642,989,241 Total investments measured at fair value $ 884,523,095 The valuation of investments measured at NAV per share, or its equivalent, is presented on the following tables: Redemption Redemption Unfunded Frequency (if Notice June 30, 2017 Fair Value Commitments Currently Available) Period International equity funds: (A) Commingled funds $ 242,430,662 $ - Daily-monthly 5-30 days Hedge fund 30,266,636 - Quarterly 45 days Absolute return funds (B) 248,817,696 - Quarterly-biannually days Fixed income fund (C) 10,231,690 - Private equity limited partnerships (D) 66,653,382 22,462,808 Real estate and other real asset funds: (E) Commingled funds 63,571,690 - Monthly 30 days Limited partnerships 53,697,419 35,975,780 Total investments measured at NAV $ 715,669,175 $ 58,438,588 20

22 Notes to Financial Statements A. International equity funds include investments in five commingled funds that hold approximately 71 percent of the funds investments in publicly traded non-u.s. stocks and 29 percent in publicly traded U.S. stocks and cash. This type also includes an investment in a fund that invests in long/short hedge funds and whose underlying funds hold approximately 66 percent of the funds investments outside of North America. The fair values of the investments in this type have been determined using the NAV per share of the investments. B. Absolute return funds are comprised of 12 hedge funds, including two stub positions, that employ long/short equity, long/short credit, event-driven, distressed, special situations, relative value and macro strategies. The funds are valued monthly based on the NAV per share. Approximately 3 percent of the value of investments in this type is held in non-marketable securities and is illiquid. Investments representing approximately 33 percent of the value of the investments in this type cannot be redeemed because the investments do not allow for redemption in the first 36 months after acquisition or have rolling lock-up periods of 12 to 24 months. The remaining restriction period for these investments ranged from 1 to 21 months at June 30, C. The fixed income fund in this type is a fund that provided lending for an economic development project in North Carolina. This investment can never be redeemed with the fund. Instead, the nature of the investment in this type is that distributions are received through the liquidation of the underlying assets of the fund. If these investments were held, it is expected that the underlying assets of the fund would be liquidated over a period of approximately 2 years. D. Private equity limited partnerships are comprised of 17 private equity funds that utilize buyout, distressed, special situations, growth capital, mezzanine and venture capital strategies. The underlying companies within the limited partnerships span all the Global Industry Classification Standard ( GICS ) economic sectors. These investments can never be redeemed with the funds. Instead, the nature of the investments in this type is that distributions are received through the liquidation of the underlying assets of the fund. If these investments were held, it is expected that the underlying assets of the fund would be liquidated over a period of approximately 10 years. E. Real estate and other real assets funds include two commingled funds and 19 private limited partnerships. One commingled fund invests in publicly traded real estate investment trusts ( REITs ) and is a long only strategy. One commingled fund invests in publicly traded master limited partnerships ( MLPs ) primarily in the energy sector and is a long only strategy. The fair values of the commingled funds in this type have been determined using the NAV per share of the investments. Nine of the private limited partnerships invest in real estate and ten invest in natural resources. These investments can never be redeemed with the funds. Instead, the nature of the private limited partnerships in this type is that distributions are received through the liquidation of the underlying assets of the fund. If these investments were held, it is expected that the underlying assets of the fund would be liquidated over a period of approximately 10 years. 21

23 Notes to Financial Statements Redemption Redemption Unfunded Frequency (if Notice June 30, 2016 Fair Value Commitments Currently Available) Period International equity funds: (A) Commingled funds $ 203,963,280 $ - Daily-monthly 5-30 days Hedge fund 26,959,156 - Quarterly 45 days Absolute return funds (B) 219,954,055 - Quarterly-biannually days Private equity limited partnerships (C) 71,097,365 8,408,587 Real estate and other real asset funds: (D) Commingled funds 63,731,511 - Monthly 30 days Limited partnerships 57,283,874 33,780,275 Total investments measured at NAV $ 642,989,241 $ 42,188,862 A. International equity funds include investments in five commingled funds that hold approximately 71 percent of the funds investments in publicly traded non-u.s. stocks and 29 percent in publicly traded U.S. stocks. This type also includes an investment in a fund that invests in long/short hedge funds and whose underlying funds hold approximately 27 percent of the funds investments outside of North America. The fair values of the investments in this type have been determined using the NAV per share of the investments. B. Absolute return funds are comprised of 12 hedge funds, including two stub positions, that employ long/short equity, long/short credit, event-driven, distressed, special situations, relative value and macro strategies. The funds are valued monthly based on the NAV per share. Approximately 3 percent of the value of investments in this type is held in non-marketable securities and is illiquid. Investments representing approximately 26 percent of the value of the investments in this type cannot be redeemed because the investments do not allow for redemption in the first 36 months after acquisition or have rolling lock-up periods of 12 to 24 months. The remaining restriction period for these investments ranged from 6 to 33 months at June 30, C. Private equity limited partnerships are comprised of 16 private equity funds that utilize buyout, distressed, special situations, growth capital, mezzanine and venture capital strategies. The underlying companies within the limited partnerships span all the GICS economic sectors. These investments can never be redeemed with the funds. Instead, the nature of the investments in this type is that distributions are received through the liquidation of the underlying assets of the fund. If these investments were held, it is expected that the underlying assets of the fund would be liquidated over a period of approximately 10 years. 22

24 Notes to Financial Statements D. Real estate and other real assets funds include two commingled funds and 18 private limited partnerships. One commingled fund invests in publicly traded REITs and is a long only strategy. One commingled fund invests in publicly traded MLPs primarily in the energy sector and is a long only strategy. The fair values of the commingled funds in this type have been determined using the NAV per share of the investments. Nine of the private limited partnerships invest in real estate and nine invest in natural resources. These investments can never be redeemed with the funds. Instead, the nature of the private limited partnerships in this type is that distributions are received through the liquidation of the underlying assets of the fund. If these investments were held, it is expected that the underlying assets of the fund would be liquidated over a period of approximately 10 years. 3. Cash and Investments The Foundation considers highly liquid temporary cash investments with a maturity of three months or less when purchased to be cash equivalents. However, cash investments with a maturity of three months or less that were purchased with the intent to be maintained as an investment are classified as investments. According to the Foundation s investment policy adopted by the Board of Directors, the Foundation may invest in any of the following broad asset classes: domestic equities; real estate; mutual funds; foreign equities; fixed income securities; cash equivalents; and alternatives. The Foundation maintained no direct investments in derivatives at June 30, 2017 and Custodial credit risk for deposits is the risk that, in the event of the failure of a depository financial institution, a government will not be able to recover deposits or will not be able to recover collateral securities that are in the possession of an outside party. The Foundation has no policy that contains requirements that would limit the exposure to custodial credit risk for deposits. At June 30, 2017, the carrying amount of the Foundation s deposits was $1,286,773 and the bank balance, excluding in-transit items, was $2,114,879. Of the bank balance, $673,899 was covered by Federal Depository Insurance and $1,440,980 was uninsured and uncollateralized. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The Foundation monitors the interest rate risk inherent in its portfolio by measuring the effective duration of its portfolio. The Foundation has no specific limitations with respect to duration. At June 30, 2017, the Foundation had investments in U.S. Treasuries with an average duration of years and fair value of $58.6 million and investments in two fixed income security funds with an average duration of 2.61 years and fair value of $53.9 million. The Foundation also had an investment in a money market fund with a fair value of $65.7 million at June 30, 2017, and duration of 0.12 years. Credit risk is the risk that an issuer of an investment will not fulfill its obligations. Credit risk is measured by the assignment of a rating by a nationally recognized statistical rating organization. The Foundation s investment policy has no specific limitations with respect to credit quality, but provides that approximately 50% of the fixed income allocation will be allocated to U.S. Treasury strategies. At June 30, 2017, the Foundation had investments in two unrated fixed income funds with a fair value of $53.9 million. At June 30, 2017, the Foundation had an investment in a money market fund rated AAA with a fair value of $65.7 million. 23

25 Notes to Financial Statements For an investment, the custodial risk is the risk that in the event of the failure of the counterparty, the Foundation will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The Foundation has no written policy on custodial credit risk; however, based on the nature of the investments the Foundation currently holds, management does not consider custodial risk to be significant. Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value of an investment or a deposit. The Foundation s investment policy does not limit the amount invested in foreign currency-denominated investments. The Foundation s investments are summarized below: June 30, 2017 % 2016 % U.S. Treasuries $ 58,066, $ 69,777, Fixed income funds 62,105, ,835, Domestic stocks and equity funds 145,920, ,920, International equity funds 272,697, ,922, Absolute return funds 248,817, ,954, Private equity limited partnerships 66,653, ,097, Real estate and other real asset funds 117,269, ,015, Money market funds 65,652, ,659, Certificates of deposit 100, , Total investments $ 1,037,281, $ 915,282, The following summarizes the investment return and its classification in the accompanying Statements of Activities and Governmental Fund Revenues, Expenditures, and Changes in Fund Balance: Year ended June 30, Dividends and interest $ 9,324,377 $ 8,964,605 Net realized gains 42,528,169 11,101,404 Net unrealized gains (losses) 67,460,693 (21,830,949) Management fees (2,633,573) (2,442,970) Net investment income (loss) $ 116,679,666 $ (4,207,910) The calculation of realized gains and losses is independent of a calculation of the net change in the fair value of investments. Realized gains and losses on investments that have been held in more than one fiscal year and sold in the current year were included as a change in the fair value of investments reported in the prior years and current year. 24